Takeaway: Builder confidence appears to be decoupling from reality as actual construction activity plunges for the second month in a row.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.


(LACK OF) STARTS - Compendium 071714


Today's Focus: May Housing Starts & Permits

The Census Bureau released its monthly Housing Starts & Permits data for June this morning. The big takeaway is this: No Growth. Incidentally, this is the same

takeaway as last month. 


This data is a splash of cold water on yesterday's improved HMI reading as the two have historically not exhibited a lead/lag relationship. 

  • Total Starts - Declined -92K MoM (-9.3%), back below the 900K level to 893K with both single and multi-family starts declining MoM. Total Starts for May were revised lower to 985K from 1001K.
  • Single Family - Declined -57K MoM (-9.0%) to +575K while permits increased +16K (+2.6%) sequentially to +631K.  The soft'ish starts number is not particularly surprising given permits have been running below starts YTD.   
  • Multi Family - Starts down for a 2nd straight month, declining -35K MoM (-9.9%) to 318K (from 353K in May and 414K in April).  MF permits declined sequentially as well, down -58K MoM to 332K – the lowest level since August of last year.


NAHB HMI vs Starts:  Builder confidence has decoupled from the reality of actual new construction activity the last few months.  As we highlighted yesterday, builder optimism led the upside in the NAHB HMI gain in July with the forward expectations component registering a disproportionate increase.    With permits running largely flat with starts YTD (& declining in the latest month) the upside for starts over 2H appears somewhat constrained and more likely that confidence re-couples to starts than the converse.


As a reminder, there are three factors principally responsible for the ongoing weak performance for housing. First, QM rules that took effect early this year are having a suppressing effect on credit availability. Second, institutional investor demand for properties is waning sharply. Third, affordability dynamics have swung sharply; whereas 12-18 months ago there was a strong asymmetry favoring homeownership, today renting vs owning are close to a toss-up.


(LACK OF) STARTS - Single Family Starts vs NAHB


(LACK OF) STARTS - SF Starte   Permits TTM


(LACK OF) STARTS - SF Starte   Permits LT


(LACK OF) STARTS - MF Starts   Permits TTM


(LACK OF) STARTS - MF Starts   Permits LT







About Housing Starts & Permits:

The US Census Bureau records the number of new housing units that have obtained permits for construction and those that have begun construction. This data includes new buildings intended primarily as residential units. The US Census Bureau defines a start as, “Start of construction occurs when excavation begins for the footings or foundation of a building.” 



Joshua Steiner, CFA


Christian B. Drake

ICI Fund Flow Survey - First Outflow in Municipals in 26 Weeks

Takeaway: Despite bond funds continuing to out gain stocks funds in new attracting new capital, muni bonds had their first outflow in over 5 months

Investment Company Institute Mutual Fund Data and ETF Money Flow:


In the most recent 5 day period, aggregate bond funds including both taxable and tax free products netted another $2.7 billion in new investor subscriptions. Conversely, the combined equity mutual fund complex had only a slight rebound in fund flow with $700 million coming into the category. The broad take-away is that the U.S. retail investor has been retrenching for most of the first half of the year (with only one week of outflows in the past 22 weeks in taxable bonds and 25 of 26 weeks of tax-free or muni bond inflows). This compares to over 2 consecutive months of outflows in U.S. stock funds. We are positioned accordingly with this emerging asset allocation having removed T Rowe Price from our Best Ideas list on May 14th (see report here) and are positioned more conservatively with our ongoing Long recommendation of leading fixed income manager Legg Mason (see our LM research here).


Total equity mutual funds put up a slight inflow in the most recent 5 day period ending July 9nd with $661 million coming into the all stock category as reported by the Investment Company Institute. The composition of the $661 million subscription continued to be weighted towards international equity funds with $1.7 billion coming into international stock funds which was offset by a $1.0 billion redemption in domestic equity products. This drawdown in domestic equity funds has become an intermediate term trend with now the eleventh consecutive week of outflow in the category. The running year-to-date weekly average for equity fund flow is now a $1.9 billion inflow, which is now below the $3.0 billion weekly average inflow from 2013. 


Fixed income mutual fund flows had a decent week of production with the aggregate $2.7 billion that came into the asset class besting the 2014 running year-to-date average inflow of $2.2 billion. The inflow into taxable products of $3.2 billion made it 21 of 22 weeks with positive flow for the category. However municipal bond funds broke their streak of 25 consecutive weeks of inflow with a $482 million outflow. Over the past 5 months over $10.0 billion has flowed back into tax-free or muni products after a significant draw down to end 2013. The 2014 weekly average for fixed income mutual funds now stands at a $2.2 billion weekly inflow, an improvement from 2013's weekly average outflow of $1.5 billion, but still a far cry from the $5.8 billion weekly average inflow from 2012 (our view of the blow off top in bond fund inflow). 


ETF results were mixed during the week with inflows into equity funds and outflows in fixed income products. Equity ETFs put up a $2.5 billion subscription, making it 6 of 7 weeks with significant inflows, while fixed income ETFs suffered another outflow of $20 million. The 2014 weekly averages are now a $1.6 billion weekly inflow for equity ETFs and a $824 million weekly inflow for fixed income ETFs. 


The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $494 million spread for the week ($3.2 billion of total equity inflow versus the $2.7 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $5.8 billion (more positive money flow to equities), with a 52 week high of $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.5 billion (negative numbers imply more positive money flow to bonds for the week). 


Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.   


ICI Fund Flow Survey - First Outflow in Municipals in 26 Weeks - ICI chart1

ICI Fund Flow Survey - First Outflow in Municipals in 26 Weeks - ICI chart2



Most Recent 12 Week Flow in Millions by Mutual Fund Product:


ICI Fund Flow Survey - First Outflow in Municipals in 26 Weeks - ICI chart3


ICI Fund Flow Survey - First Outflow in Municipals in 26 Weeks - ICI chart4


ICI Fund Flow Survey - First Outflow in Municipals in 26 Weeks - ICI chart5


ICI Fund Flow Survey - First Outflow in Municipals in 26 Weeks - ICI chart6


ICI Fund Flow Survey - First Outflow in Municipals in 26 Weeks - ICI chart7



Most Recent 12 Week Flow Within Equity and Fixed Income Exchange Traded Funds:


ICI Fund Flow Survey - First Outflow in Municipals in 26 Weeks - ICI chart8


ICI Fund Flow Survey - First Outflow in Municipals in 26 Weeks - ICI chart9



Net Results:


The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $494 million spread for the week ($3.2 billion of total equity inflow versus the $2.7 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $5.8 billion (more positive money flow to equities), with a 52 week high of $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.5 billion (negative numbers imply more positive money flow to bonds for the week). 


ICI Fund Flow Survey - First Outflow in Municipals in 26 Weeks - ICI chart10 




Jonathan Casteleyn, CFA, CMT 




Joshua Steiner, CFA

LEISURE LETTER (07/17/2014)



  • July 23:  TRIP 2Q call (430pm)
  • July 24:  
    • WYN 2Q call (830am)
    • PNK 2Q call (9am)
    • LHO 2Q call (930am)
    • PENN 2Q call (10am)
    • HOT 2Q call (1030am)
  • July 25:
    • PEB 2Q call (9am)


590:HK – Luk Fook Holdings Ltd saw its same store sales growth drop by 54% in Macau and Hong Kong in the first quarter of 2015 (a period between April 1 and June 30, 2014, according to a filing with the Hong Kong Stock Exchange) over that of the same period a year earlier. Same store sales of gold products declined 65%, gold sales by weight dropped 63%, while gem-set jewellery dropped 20% for the group’s stores in Macau and Hong Kong. At the end of June, Luk Food Holdings had 1,290 licensed stores around the world, an increase of 22 stores year/year, of which 83 were in mainland China, 44 in Hong Kong and 10 in Macau. 

Takeaway: Confirmation of a Chinese spending slowdown and slower Macau trends.


LVS & 1928:HK – Macau Boxing Card Set, Filipino boxer Manny Pacquiao will fight Chris Algieri, an American junior welterweight titleholder, on November 22 at the Venetian Macao’s Cotai Arena.

Takeaway: Setting the stage for a big weekend in Macau.


PENN & GLPI – Argosy Sioux City filed an appeal with the Iowa Supreme Court to keep the riverboat casino from closing next Tuesday. Attorneys for Argosy parent Penn National Gaming Co. asked the Supreme Court for an immediate, emergency stay of a District Court judge's ruling Monday that affirmed a state gaming regulatory order to shutter the gambling boat. Argosy argues the district court order, like the IRGC ruling it affirmed, "is based on errors of law and is not supported by substantial evidence."

Takeaway: Last and final legal option to keep the property open. We are skeptical the Supreme Court will "take up" the case and the filings contain no new arguments for keeping the property open.


CCL –  (TTG Digital) Cunard reports post-World Cup booking spike  

Cunard has reported a 36% increase in bookings on Monday July 14 and Tuesday July 15 compared with the same two days the previous week.  It added high street agents were also seeing a boost in footfall numbers and it is hoping to drive more business with the summer sale running for the rest of July for holidays departing from September 1, 2014, to June 30, 2015.

Takeaway:  With all the bad commentary surrounding the World Cup, it's good to hear someone benefited.


NCLH – Norwegian Cruise Line is offering free balcony upgrades and up to $200 credit for select sailings booked by Saturday, July 19. These "Sun & Fun Free for All Bonus Days" price breaks can be applied on top of other discounts,

Takeaway:  Incentives keep coming.


Macau Slot Monitoring – Macau’s Gaming Inspection and Coordination Bureau (DICJ) is considering asking casino operators to provide enhanced surveillance – via video security camera – of slot machine jackpot displays

Takeaway: More regulations for an already highly regulated industry.


Hengqin Island Land Allocation to Macau – The Guangdong Province governor, Zhu Xiaodan, revealed during yesterday’s annual Guangdong-Macau Cooperation Joint Conference that a “Macau area” measuring 10 square kilometers will be established on Hengqin Island. However, no details of cooperation were disclosed. Mr Zhu suggested that the project would have to wait until the land is reclaimed before any concrete negotiations can begin.

Takeaway: We expect to see the gaming operators begin selling reasons why they should be allocated a portion of this land to support their Macau base of operations.


Resorts World Manila – Travellers International is a joint venture between Philippines-based Alliance Global Group Inc and Genting Hong Kong Ltd, a subsidiary of Malaysia’s Genting Bhd confirmed the second phase of Resorts World Manila, which includes the expansion of the Marriott Hotel Manila and the addition of 227 rooms, should be ready by the end of 2015.

Takeaway: On time opening


Ho Tram Strip – Private equity firm NewCity Capital LLC is to be a “new financial partner” in the Ho Tram Strip beachside casino development according to Asian Coast Development (Canada) Ltd (ACDL) but further details were not disclosed. NewCity Capital, founded by American investor Chien Lee, is investing via a vehicle called NewCity Ho Tram Investment Co. It has also set up an entity called The GrandNewCity. Full build-out of the Ho Tram development is a US$4-billion project with up to five integrated resorts, encompassing 9,000 five-star rooms, and 180 tables and 2,000 electronic gaming machines in two casinos. 

Takeaway: Maybe this project finally gets off the ground?


Georgia Casino Boat Runs Aground – the Escapade, a casino boat ran aground off the Georgia coast during its maiden voyage on Wednesday. The 174-foot-long Escapade was still stranded about 1.8 miles off the north end of Tybee Island, a popular beach destination east of Savannah, in the Calibogue Sound near Hilton Head, South Carolina. The Escapade is a casino ship operated by Florida-based Tradewinds Casino Cruise. After being stranded for more than 15 hours, about 90 of The Escapade's 96 passengers and 27 crew members arrived at the dock shortly after 4 p.m., nearly a full day after the boat left for the maiden voyage of its operator's new Savannah service Tuesday night. Four people were ferried ashore by helicopter

Takeaway: First day operational challenges.


Texas Gaming Expansion – The Texas Gaming Commission begins weighting slot machine type devices at racetracks. The issue came before the commission last month, proposed by the industry, and members decided to let Texans weigh in on the issue. A 30-day public comment period continues until July 27, and the issue could come before the commission for a vote as soon as Aug. 12. This electronic racing, which would be displayed on machines similar in size and appearance to slot machines, would randomly replay races that have already been held but stripped of any information — such as horse names, dates, location — that could identify which race it was. Any expansion of Texas gambling would require approval from two-thirds of lawmakers in both chambers of the legislature — as well as from Texans. Commission officials say they have looked into the issue and a rule change to allow instant gaming isn’t an expansion of gambling.

Takeaway: Could this be the first step forward for legal gambling in Texas? The long-term threat to Louisiana and PNK persists.


Insider Transactions:

ISLE - CFO Eric L. Hausler sold 6,200 shares on Monday, July 14th via a 10b5-1 plan at an average price of $8.57 and now owns 54,733 shares


Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye

Macro/Financials team is turning decidedly less positive. 

Takeaway:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.

real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.


Estimates going lower but sell side clinging to the healthy mass thesis.  We’re worried about decelerating 2H mass growth, more competitive market conditions for premium mass, and the difficult Singapore macro environment.




We remain negative on the Macau operators as a whole based in part to our mass decelerating theme -  the bad VIP/good mass thesis is so yesterday.  The LVS release highlighted additional issues facing the operators.  Mass margins were disappointing and we wonder if the premium segment is getting more competitive – a thesis put to us by more than one source during our June Macau tour. Promotional expenses were higher than expected. Labor expenses are likely to rise as Macau unemployment remains extremely low in the face of a lot of new supply.  LVS  initiated a “preemptive strike” but retention bonuses may become the norm. Finally, MBS is facing a very difficult macro environment which wasn’t discussed on the call but should result in lower EBITDA estimates going forward.



Our earnings preview highlighted that LVS was the Macau company we thought would miss even reduced expectations and they didn’t disappoint – well, they did disappoint the overwhelmingly bullish Street.  In fact, LVS missed our below-the-Street projections across the board.  How did they do it?  They double dipped on revenues and margins.  Revenues missed the Street by $175m (Hedgeye by $72m) and EBITDA fell $83m below the Street (-$45m vs Hedgeye).


As we pointed out, in our 07/15/14 note, "SINGAPORE: MALIGNANT MACRO" the deteriorating Singapore environment was likely to pressure MBS volumes in Q2 – it happened – and going forward as well.  We’ll see where the Street shakes out but we lowered our projection.  More surprising were the lower margins in Macau which management blamed on mass mix shift to lower margin premium mass.  We’ve been worried about the potential for lower margins in premium mass as mass revenue growth decelerates and the competitive environment escalates.  Could we be seeing that already?  The upcoming earnings releases by LVS’s competitors will be telling.





We remain below the Street for 2H 2014 in Macau and Singapore.  Our full year company EBITDA estimate is $5.39 billion while EPS checks in at $3.68.



Marina Bay Sands

Marina Bay Sands reported Gross Gaming Revenues of $785m, a 1% YoY increase thanks to high hold of 3.45%.  We computed on a hold-adjusted basis that EBITDA would have been $365m.  Based on our analysis of trends in reported betting taxes, we believe Singapore GGR was flattish in Q2.  Thus, we expect Resorts World Sentosa to also report flattish GGR on slightly higher hold. 

But we are concerned about MBS and Singapore on several fronts:

  • As we pointed out in our note, “SINGAPORE: MALIGNANT MACRO” (7/15/14), the macro environment have deteriorated significantly in the city-state. 
  • VIP rolling chip volume has plunged for three straight quarters.  Adelson’s comment about higher hold has some validity but probably not overly material.  Just look at Q4 2012 when MBS only held at 1.92%, whereas VIP volumes fell 17% YoY.  Or check out Q1 2012 when MBS played very lucky at 3.58% on top of 26% growth in VIP volumes.
  • Mass volume dropped for the 2nd straight quarter.  Mass has been stuck in the $1.1-$1.2bn roll.
  • Q2 REVPAR declined for the 1st time QoQ due in part to more rooms
  • Tightening of VIP credit
    • While provision for doubtful accounts was ok in Q2 at $33m or 4.2% of GGR, it may pick up as lending dries up.
  • Continued government scrutiny over local casino visitors 


Here are some interesting details regarding LVS’s other properties:


Las Vegas

  • Table drop fell 20% YoY, its worst performance since Q2 2002
  • Rebates as a % of GGR fell to 3.6%, lowest since Q4 2012

Sands Macau

  • Despite 170 less slot machines, slot volume continued to do well, hitting a new quarterly record of $832m in Q2 2014
  • Mass volume beat our estimate by 13%, rising 32% to $1.08 bn
  • Mass hold fell to 17.5%, the lowest hold since 2005
  • Fixed costs rose 49% YoY

Venetian Macau

  • Although mass volume slipped 7% QoQ, it was better than what we estimated
  • Fixed costs were $12m higher our estimate, contributing to a 80bps margin decline
  • Promotional expenses as a % of non-gaming revenues was 29%, unchanged from Q1 2014 and the highest level seen at the property

Four Seasons

  • Surprisingly, slot volume fell 6% to $170m, which was offset by higher slot hold (6.5%)
  • Mass volume skyrocketed for the 5th straight quarter, +97% YoY.
  • Mass hold was 21.9%, the lowest level since 2008
  • VIP revenue missed our estimate as VIP hold was 3.08% for Q2, with an estimated 19% of Direct VIP volume

Sands Cotai Central

  • Mass came in a little lighter than expected
  • Mass hold has been steady since ramp in Q2 2012
  • Added 33 tables in the quarter to 495 tables


Client Talking Points


Yield straight back down to 2.51% this morning and remains in what we call bearish TAIL risk mode – no support to the year-to-date closing lows and from an intermediate-term perspective closer to 2.21%. Keep buying bonds and equities that look like bonds versus U.S. #ConsumerSlowing.


Same story as bond yields – Russell 2000 is back to down year-to-date and bearish TREND (our TREND resistance line = 1175) and this is a much purer (and profitable) hedge on U.S. domestic consumption growth than SPY.


Bond yields down, Russell down, Gold up – call us crazy, but in our opinion this all rhymes with slowing growth expectations. For Gold to make a run for its year-to-date highs, we think we need to see a breakout above $1324 – stay tuned.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds. Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.


Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.


Legg Mason reported its month ending asset-under-management for April at the beginning of the week with a very positive result in its fixed income segment. The firm cited “significant” bond inflows for the month which we calculated to be over $2.3 billion. To contextualize this inflow amount we note that the entire U.S. mutual fund industry had total bond fund inflows of just $8.4 billion in April according to the Investment Company Institute, which provides an indication of the strong win rate for Legg alone last month. We also point out on a forward looking basis that the emerging trends in the mutual fund marketplace are starting to favor fixed income which should translate into accelerating positive trends at leading bond fund managers. Fixed income inflow is outpacing equities thus far in the second quarter of 2014 for the first time in 9 months which reflects the emerging defensive nature of global markets which is a good environment for leading fixed income houses including Legg Mason.

Three for the Road


Kinder Morgan Energy Partners reports Q2 distributable cash flow $561M vs. FactSet consensus $588M @HedgeyeEnergy


You’ve got to look for tough competition. You’ve got to want to beat the best.

-Grete Waitz


6, the number of years since Tiger Woods won his last major golf tournament. Woods is playing in the British Open at the Royal Liverpool Golf Club in England, which begins today. 

CHART OF THE DAY: $Yelp or Shareholder Friendly Tech? Your Call.

Takeaway: Stay away from YELP. Stick with companies in the semiconductor space that will increase dividends.


CHART OF THE DAY: $Yelp or Shareholder Friendly Tech? Your Call. - Chart of the Day

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.